Investing in 'physical' gold

"Paper" gold comes with risks

Some investors may confuse possession of gold-mining equities, exchange traded funds and other “paper” gold products with ownership of “physical” gold, such as this 2012 American Eagle 1-ounce gold bullion coin. Images courtesy of U.S. Mint.

I believe most investors and savers should hold up to 10 percent of
their investable assets and personal savings in physical gold — and
for some investors, a greater percentage allocation to gold may be appropriate.

Many investors, however, confuse the term “gold” with gold-mining
equities, gold exchange-traded funds and other “paper” gold investment products.

But when I recommend that someone invest in gold, I’m speaking of
“physical” gold — bullion bars and bullion coins — that investors can
actually hold and store on their own or with a safe deposit facility
of their own choosing.

As well, I refer to long-term holdings of physical gold — holdings
that one might wish to sell only as a last resort. If you wish to
actively trade gold, speculate in short-term price movements or bet on
gold-mining shares, go ahead, but understand that these positions
should be in addition to — not instead of — your “core” gold percentage.

One of the main reasons to own physical gold is risk reduction —
to reduce or avoid the risks that threaten ordinary investments and
savings including equities, bonds, mutual funds, gold ETFs and foreign currencies.

Gold-mining equities, unlike physical gold, do not lower risk but
actually subject the investor to a myriad of risks not associated with
ownership of the physical metal. These include management risk,
exchange or stock market risk, political and country risk, labor
issues, and tax or regulatory risks.

As well, despite the popularity of gold ETFs, it is important for
investors to understand that investing in an ETF is not the same thing
as owning the physical metal. With ETFs one does not actually own the
physical metal. Unless you are a large institutional investor, you
cannot take delivery of the physical metal.

Like other equities, there are risks inherent in ETF ownership
that are not shared by bullion bars and coins held under one’s
personal control. Consider that ETFs are subject to exchange risk and
their liquidity is dependent upon the exchange operating without
interruption. In addition, ETFs are dependent on transfer agents,
depositories and custodians all functioning honestly and as expected.

Moreover, ETFs do not provide the anonymity that accompanies
ownership of physical bullion bars and coins.

Jeffrey Nichols is a recognized expert on the economics of
precious metals markets. He is managing director of American Precious
Metals Advisors (www.NicholsOnGold.com) and
also serves as senior economic advisor to Rosland Capital LLC (www.RoslandCapital.com), a
retail dealer of precious metals investments and numismatic coins.
Follow Jeff Nichols on Twitter @ NicholsOnGold.

The Commission of Fine Artsâ recommendation for the Proof 2014 American Eagle platinum coin, left, brought outrage and derision at the Citizens Coinage Advisory Committee meeting. The CCAC recommended the design to the right.

The Commission of Fine Artsâ recommendation for the Proof 2014 American Eagle platinum coin, left, brought outrage and derision at the Citizens Coinage Advisory Committee meeting. The CCAC recommended the design to the right.

The Commission of Fine Artsâ recommendation for the Proof 2014 American Eagle platinum coin, left, brought outrage and derision at the Citizens Coinage Advisory Committee meeting. The CCAC recommended the design to the right.

The Commission of Fine Artsâ recommendation for the Proof 2014 American Eagle platinum coin, left, brought outrage and derision at the Citizens Coinage Advisory Committee meeting. The CCAC recommended the design to the right.

The Commission of Fine Artsâ recommendation for the Proof 2014 American Eagle platinum coin, left, brought outrage and derision at the Citizens Coinage Advisory Committee meeting. The CCAC recommended the design to the right.